Now it’s ready to try again with Office 365, a revamped offering that combines the features of BPOS with Office 2010. From what we’ve seen of the Office 365 beta, it still has a long way to go before it can be considered a true turnkey solution for business.

Microsoft plans to offer Office 365 in a number of service tiers, ranging from a stripped-down small-business version to one packaged for large-scale enterprises. The most attractive tiers bundle a full license to Office Professional Plus 2010 for each user, which is arguably Microsoft’s greatest advantage over online-only competitors such as Google Docs. You can save a little money if you already have your own Office licenses or if you plan to conduct all your document management in the Office Web Apps — but we think the latter is unlikely.

When users first log in to Office 365, they’re greeted by a friendly home page that allows them to navigate to various components of the suite. If your service tier supports it, users can download their copies of Office Professional Plus 2010 directly from the home page. Unfortunately it’s not the Click-to-Run version of the suite we saw demoed when Office 2010 launched. If you deploy the suite from Microsoft’s servers, it’s a 600MB download per seat; realistically, you’ll want to set up an alternate distribution system on your LAN.

What is different about this version of Office 2010is that it’s fully subscription-based. The installer obtains a product key from the Office 365 servers automatically, which presumably will be revoked if you ever let your subscription lapse. That makes installation a one-click, hands-free procedure, but we still question whether the subscription model represents real value for this category of desktop software. The supporting Web services will make or break this kind of offering.

SharePoint in the cloud

Unfortunately, the Web-based components of Office 365 are a mixed bag. Easy online collaboration via SharePoint Online is one of the more compelling features of the suite, but these features still feel half-baked. Users can simultaneously edit cloud-hosted documents created with Word and PowerPoint (but not Excel), yet changes made by other users show up only when you save your own version of the document, which feels more like traffic management than true collaboration. Alternatively, a user can “check out” a document, which blocks other users from editing it until it’s checked back in.

Unlike Office Web Apps, which are reasonably browser-agnostic, Office 365 delivers various components as ActiveX controls, and it’s not always easy to predict when and where those controls will be needed. If your browser doesn’t support ActiveX, certain features will simply be grayed out, and it can be hard to tell whether that’s due to a permissions problem, an as-yet-unimplemented feature, or because you need to try again using Internet Explorer.

Moreover, working from Microsoft’s servers felt sluggish compared to a LAN, even over a fast Internet connection. Attempts to create, save, and update files were occasionally met with frustrating delays, making us long for a more traditional file server. Hopefully server performance will improve as the product leaves beta, but in general the Office applications don’t feel as robust running on a Web-hosted workspace as on a local one.

Cohesion between its various components is where Office 365 Beta feels shakiest. The Office 365 home page carries a familiar Office 2010 look and feel, and Office Web Apps continue to emulate their desktop equivalents as closely as possible. However, SharePoint Online is an entirely different beast, resembling neither Office nor Windows. It’s hard to see how these disparate components come together to form a single business solution.

Worse, it’s difficult to navigate between modules of the suite. Once you move from the home page to the SharePoint Team Site, there are no obvious links to get you back to where you came from. In addition, the Back button is unreliable, so the process of exploring the suite becomes an unnecessarily tedious chore. Microsoft has a lot of work to do if it hopes to make the user experience of its hosted server software as readily accessible as Office 2010.

Exchange and Lync

Exchange Online will no doubt be one of the most attractive components of Office 365, particularly for small and midsized businesses, and it functions much as expected. Each user is given an inbox that integrates with Outlook 2010 and the Outlook Web Client, complete with an Internet email address that maps to a custom subdomain on the Office 365 servers.

In crafting the administration screens for Exchange Online, Microsoft has walked a fine line between simplicity and power. Admins can manage user accounts and organize them into distribution groups, create mail rules, generate audit reports, set up devices for use with ActiveSync, and draft a Bad Words policy to screen email, if desired. But your control of these features is somewhat limited, and many admins may find themselves wishing for more. For example, we’re told the Exchange Online server incorporates “industry-leading anti-virus and anti-spam solutions,” but if so, they’re black boxes, with no controls to allow admins to tune or monitor them.

Another key selling point of Office 365 is Lync Online, a hosted version of Microsoft’s revamped Communications Server. We experienced some provisioning problems at first, but once we were up and running, Lync allowed us to see presence and contact information for authors of collaborative documents, enhancing the workgroup experience considerably.

Lync also allowed us to launch IM, voice, and video chat sessions with our contacts, as well as share our screens for presentation. It’s a powerful addition to the suite and an impressive unified communications solution — although it may be a little ahead of the curve for some small businesses.

In all, Office 365 brings a lot of technology to the table, and Microsoft’s promise to eliminate some of the drudgework of IT administration is compelling. We just hope that as it moves beyond this early beta period, Microsoft manages to smooth out some of the navigation issues and gives the overall suite a more consistent user experience. With an offering this complex, however, that may be a tall order.